A number of states have issued economic stimulus checks this year. California reduced checks to help residents with high gas prices, and New Mexico gave its citizens bribes from oil and gas profits. These are in addition to federal stimulus checks sent during the height of the pandemic.
But these “windfall” payments don’t necessarily mean people spend more money on extra things, like new shoes or eating out. A recent study from the Federal Reserve Bank of New York shows that people often use government stimulus money to pay down debt, especially if they have a lot of it. This can help families achieve greater financial stability in the future.
Sabrina Calazans graduated from college in 2019 with a huge student debt. But she didn’t find a job until almost two years later — well into the COVID-19 pandemic. “So it was a really tough period for me,” she said.
Her federal student loans were paused during the pandemic, but Calazans also faced private loans. So those government stimulus checks she got came in handy.
“For my private student loans, my interest rate was about 12% and 13%,” she said. “So I really wanted to address that as much as possible.”
Calazans said she also used some of the money to pay off credit card debt. That’s not unusual, especially for people who owe a lot of money at high interest rates, according to Gizem Koşar, a research economist at the New York Federal Reserve.
“On average, we see people in debt spending about 40% of their stimulus checks to pay back their debt,” she said.
This comes from a recent study Koşar and her colleagues published using COVID stimulus payment data. Now a lot of people also bought stuff for their homes with those checks, which got a lot of attention because of all the supply chain problems it caused.
But it turns out, according to Koşar, that paying off debt has an effect on the future economy. “Paying off your debt actually increases your future consumption, and that gives you a higher enjoyment of life.”
That said, the COVID stimulus payments may be unique, said Scott Baker, a professor of finance at Northwestern University.
While previous stimulus measures — from 2008 and 2001 — were designed to “stimulate” growth by incentivizing spending, Baker explained that COVID-era payments went into a different economy and were meant to keep people afloat.
“If you expect people to go out and spend frivolously on, you know, travel or eating out at fancy restaurants, they wouldn’t really be able to do those things even if they wanted to during COVID,” he said.
With fewer spending options, Baker added that it makes sense that people would have used stimulus money to make up for things like student loans or credit card debt.
And what about this current round of stimulus checks that some states have handed out this year? Baker points out that they come at a time when the rent waivers and suspension of federal student loan payments are ending.
While Baker expects some additional spending, “households are likely to pay down some debt as well.”
Especially now that interest rates are as high as they are now.
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